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This article first appeared in The Edge Financial Daily, on May 3, 2016.

 

Gadang Holdings Bhd
(April 29, RM2.08)

Maintain “buy” with a higher target price (TP) of RM2.85: We continue to like Gadang Holdings Bhd for its strong earnings visibility and undemanding valuation. Its nine-month financial year 2016 (9MFY16) results were above expectations, accounting for 91%/85% of our/consensus full-year estimates. 

We maintain our “buy” recommendation at a higher sum-of-parts-derived TP of RM2.85 (from RM2.83). This TP comes after our earnings revisions, as well as taking into consideration the cash infusion and an enlarged share base from its recently completed private placement.

Gadang’s 23.1 million new private placement shares have been fixed at RM1.85 per unit, raising about RM42.7 million. This is expected to be mainly utilised in developing subsequent phases of its Laman View project in Cyberjaya, and the Semenyih land that was acquired in late 2015. As at February, both Phases 1A and 1B of the Laman View project (comprising 325 Prima 1 apartments and 142 double-storey houses, launched in June and July 2015 respectively) reported fairly encouraging take-up rates. 

Its Semenyih land is to be partly used to develop affordable homes under the Rumah SelangorKu programme. We note that Gadang is eyeing potential joint ventures (JV) for future affordable home development in the Klang Valley and Johor. We are generally more positive on the affordable housing segment due to the resilient demand.

As at February, its outstanding construction order book and unbilled property sales remained healthy at around RM889.5 million and RM243.5 million respectively. Its tender book has also increased to around RM9 billion (from RM5 billion). All in, we view that Gadang’s earnings visibility remains fairly strong over the next two to three years.

We increase our earnings forecasts for FY16 to FY18 by 9.5% to 11.4% by mainly adjusting our assumptions on the profit margin for its various construction orders, as well as the progress billing schedule of its property developments.

The revised TP implies nine times 2016 forecast price-earnings ratio (PER), which remains below our benchmark one-year forward target PER for small- and mid-cap construction stocks of 10 times to 14 times. — RHB Research Institute, April 29

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